GE GE Aerospace

By Theo Francis and Ted Mann 

Federal securities regulators have warned General Electric Co. the company could face a civil-enforcement action over its accounting for a legacy insurance business, adding a fresh hurdle to efforts to turn around the once-mighty manufacturer.

The industrial giant said in a securities filing Tuesday that it received the so-called Wells notice on Sept. 30 over the company's accounting for reserves related to an insurance business it has been trying to wind down for years.

A Wells notice is a letter saying the SEC staff is recommending that the commission bring an enforcement action and gives the recipient an opportunity to argue why the action shouldn't be taken.

The SEC and the Justice Department have been investigating GE's accounting for about two years after the company disclosed large write-downs tied to the insurance business and its power business.

GE has said it is cooperating with the government investigators. In the filing, the company said it "disagrees with the SEC staff with respect to this recommendation and will provide a response through the Wells notice process."

Accounting problems were recognized internally in late 2017 as GE was struggling with declining profits and cash flow following the departure of former CEO Jeff Immelt. The company later disclosed, in January 2018, that it needed to bolster its insurance reserves by $15 billion and booked a $6 billion charge. In early 2018, GE said it was also the subject of a criminal probe by the Justice Department.

Many investors were surprised by the insurance situation, partly because GE executives had repeatedly declared the company had shed its insurance risk. GE spun off most of its insurance holdings into Genworth Financial Inc. in 2004 and sold much of the rest to Swiss Reinsurance Co. two years later.

But GE kept the risk for a bloc of long-term-care insurance policies, written by GE Capital until 2006. Such policies pay for nursing homes and assisted-living facilities. They have proved to be an expensive problem for the insurance industry, which underestimated how much the policies would need to pay out.

In addition to the insurance accounting, the SEC is investigating revenue recognition practices in GE's power business and a $22 billion charge the company booked in 2018 tied to acquisitions in GE's power unit, the company has said.

The SEC staff hasn't made a decision whether to recommend any action on those matters, GE said in its Tuesday afternoon filing.

GE's stock has tumbled, and the company has slashed its dividend to a token penny per share. It also has sold off various business units, cut jobs and switched leaders, installing Larry Culp as CEO in October 2018. Mr. Culp's turnaround efforts have been hampered by the company's jet-engine business, which has been hurt by the slowdown in travel.

GE shares slipped nearly 4% to $6.16 in Tuesday afternoon trading. The company, once the most valuable in the U.S., was removed from the Dow Jones Industrial Average earlier this year.

Write to Theo Francis at theo.francis@wsj.com and Ted Mann at ted.mann@wsj.com

(END) Dow Jones Newswires

October 06, 2020 15:49 ET (19:49 GMT)

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